Collusion for a Cause: The Potential Antitrust Risk in “Socially Responsible Investing”

In recent years, investors and corporate stakeholders have increased their focus on environmental, social, and governance (“ESG”) factors in their evaluation of company performance. Investors and stakeholders use these factors to assess companies’ participation in the advancement of social policy goals, such as employee welfare or minimizing polluting activities. While these investors may be motivated by a good faith desire to promote socially beneficial ends, the concept of using ESG factors to guide “socially responsible” investment decisions has been controversial. Opponents of the ESG movement subscribe to a traditionalist view: the sole purpose of a corporation is the maximization of profit for its shareholders. Proponents of the ESG movement, however, believe that consideration of ESG factors provides a holistic, responsible approach to corporate activity.

Among the most prominent supporters of ESG investing is the Biden administration, which has prioritized socially responsible investing through calls for ESG disclosure. At the same time, however, the Biden administration has taken measures towards a stricter enforcement of antitrust laws. Many observers have pointed out the intersection—and potential conflict—between these two administrative priorities. Where antitrust laws exist to promote competition and discourage collusion between corporations, ESG-focused businesses are looking to cooperate with each other in order to appease ESG-focused investors. This cooperation creates a legal risk of antitrust enforcement by entities such as the Department of Justice or the Federal Trade Commission.

The conflict between ESG investing and antitrust enforcement is especially prevalent in the fossil-fuel energy industry. Because one of the primary goals of ESG investing is the mitigation of climate change, the movement has promoted a targeted restriction of oil and gas investment, which in turn has contributed to a decrease in oil and gas production and higher energy prices. Even where such investment restrictions are motivated to eliminate primary contributors to rising earth temperatures, criticisms of this practice have increased in the wake of Russia’s invasion of Ukraine and the resulting risk to global energy security. Many point to the pressuring influence of activist-minded investors on energy companies’ activities as a potential antitrust violation.

In March, Arizona Attorney General Mark Brnovich launched an antitrust investigation to look into potential market manipulation by large banks and money managers with an ESG-focus on climate change activism. Specifically, Brnovich argues that groups of investors made up of Wall Street Banks and money managers, such as Climate Action 100+, use “coordinated influence to compel companies to shut down coal and natural-gas plants.” Additionally, the funds used to influence companies include 401(k)s and pension plans of shareholder investors who may not share the same policy goals as environmental activist groups. When activist investors potentially collude to take action which is contrary to the actual concerns and motivations of the shareholders they represent, the potential of antitrust risk is great.

In light of this controversy, consideration of antitrust risk will likely play a critical role in the future of ESG-motivated investment. While the incorporation of business valuation factors other than the maximization of profit may affect traditional antitrust analysis, the corporate landscape is still developing in regards to ESG-motivated investing. For now, companies will most likely elect to reduce the risk of antitrust enforcement action as much as possible. According to Arnold & Porter’s “Best Practices” for the mitigation of antitrust risk when collaborating with competitors in the promotion of ESG priorities, companies should act independently when setting prices and consult pre-approved agendas for ESG-focused meetings among competitors. Even as ESG factors become increasingly prevalent in corporate investing, companies will need to adopt such practices to navigate legal issues surrounding activist-motivated investment strategies.

Benjamin Woessner is a second-year student at Wake Forest University School of Law. He holds a Bachelor of Arts in Economics and English from the College of William & Mary. After graduation, he plans to practice corporate law.